Answering Brief Filed in Clarke

The parties resisting summons enforcement have filed their brief in the Supreme Court in Clarke responding to the government’s opening brief.  Underlying the two sets of briefs is a fundamentally different perspective on the significance of holding an evidentiary hearing at which the agent issuing the summons can be questioned about his motives.  For the government, such a hearing is a big deal, and the courts should not impose that burden on the IRS on the basis of a mere allegation of an improper purpose.  For the summoned parties, such a hearing is a very limited intrusion that must be allowed upon a plausible allegation of bad faith if the notion of judicial oversight of summonses is to have any teeth at all.  They argue that, “[f]or the judiciary to fulfill its function of safeguarding against abusive summonses, it cannot be entirely dependent on one-sided submissions by the government attesting in conclusory fashion that its summons is being pursued for a proper purpose.”

Thus, the summoned parties argue that the government’s position would “transform summons enforcement into an ex parte affair” because there would be no effective way to challenge the “pro forma showing” of government good faith made by an agent’s affidavit.  The summoned party in most cases cannot realistically meet the government’s requirement that it show independent evidence of bad faith before having a hearing because that knowledge “is peculiarly within the knowledge or files of the Service”; the government’s proposed rule thus imposes a “circular burden” because the point of the hearing is give the summoned party the opportunity to develop that evidence.  The brief rejects the government’s accusation that the Fifth Circuit has created a presumption of government irregularity.  Rather, the brief argues that the presumption of regularity is intact, but the Fifth Circuit’s approach “simply allows the taxpayer an opportunity to overcome that presumption.”  As the summoned parties see it, the government’s “position is not merely that it should receive the benefit of the doubt, but that in practice it should be immune from questioning.”

The brief then addresses why the Court should agree that the summoned parties have made a sufficiently plausible showing of bad faith to justify a hearing.  As with its brief at the petition stage, this argument focuses primarily on the evidence showing that the government was interested in getting information that would assist with the Tax Court litigation, not in conducting an administrative investigation into tax liability.  As noted in our first report on this case, the court of appeals did not rely on that evidence, and the courts thus far have not held that a motivation to assist with Tax Court litigation is an improper purpose that justifies denying enforcement of a summons.  Perhaps recognizing that it may be tough to win in the Supreme Court on the present state of the record, the summoned parties specifically request an opportunity to litigate that issue, stating “if this Court vacates the judgment below, it should remand so that the court of appeals can consider whether evidence that the IRS is using a summons only to circumvent Tax Court discovery rules provides grounds for denying enforcement of the summons.”

Oral argument is set for April 23.

Clarke – Brief for Respondents

Commissioner’s Brief filed in BMC Software

The Commissioner filed his brief in the BMC Software case last week. The brief hews closely to the Tax Court’s decision below. The brief primarily relies on the parties’ closing agreement and trumpets the finality of that agreement.

The Commissioner argues that BMC’s problem is of BMC’s own making—BMC chose to avail itself of the relief available under Rev. Proc. 99-32 and signed a closing agreement under which the accounts receivable were deemed established during the relevant testing period for the related-party indebtedness rule under section 965. And as if to suggest that BMC deserves the reduction in its section 965 deduction, the Commissioner repeatedly asserts that the underlying adjustments that precipitated BMC’s use of Rev. Proc. 99-32 resulted from BMC’s “aggressive” transfer-pricing strategies.

The Commissioner briefly addresses BMC’s primary argument on appeal, which is that the relevant definition of “indebtedness” for purposes of section 965 is the definition established in case law and not—as the Tax Court had found below—the Black’s Law definition. The Commissioner’s brief argues that most of the cases on which BMC relies for a definition of “debt” are inapplicable because they arise in the context of debt-equity disputes or other settlements where the Commissioner was challenging the taxpayer’s characterization of an amount as debt. According to the Commissioner’s brief, those cases address whether the underlying substance of an instrument or payment was truly debt but that “[f]actual inquiries to ascertain whether, and when, debt was created by the parties’ dealings are irrelevant here.”

The brief also addresses BMC’s arguments that the Tax Court misinterpreted the closing agreement. The Commissioner argues that parol evidence is irrelevant because the agreement is unambiguous and that in any event, the extrinsic evidence does not support BMC’s position.

BMC’s reply brief is due April 28.

BMC Software – Commissioner’s brief